Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Donald Trump and his inflationary infrastructure plans have steepened the yield curve more in two days than the Federal Reserve has in years. If you have to hold fixed-income securities, some protection from faster consumer price growth would have been nice.

Some of the smart money crowd has already got to the U.S. inflation-linked bond market -- advocates include Pacific Investment Management Co., Blackrock Inc. and Doubleline Capital LP's Jeff Gundlach. The Bank of America Merrill Lynch global survey shows the largest-ever inflows to Treasury Inflation Protected Securities in the past two months.  

Inflation Protection's Not Enough
Inflation-linked bonds still got hit after Trump's election, just not as much as conventional bonds
Change from start date, in percentage points

The president-elect has just called time on bond markets globally, so inflation-linked debt will continue to attract those looking for a haven. But the safety is only relative -- if you're invested in bonds, your linker holdings have been less painful in recent days than your conventional debt. 

It's a different dynamic in Europe which, like the U.S. and much of the rest of the world, has been caught in a deflation trend for years. But if the world's largest economy looks set to buck that trend, it's more likely that Europe will get swept along and follow suit. The question's in the timing.

It may be too early for Europe to get ready for an inflation spike when there is such little prospect of growth. This is reflected in the relative performance of breakeven rates, a measure based on the pricing of nominal and index-linked bonds which rises when expectations for faster price gains pick up.  

Lagging Behind
U.S. breakeven rates, a measure of market expectations for inflation, have soared on Trump's election
Source: Bloomberg
Note: Data are normalized from start date

But the incredible fixed-income rout in the U.S. points to the end of Europe's bond bubble, and its dalliance with ever more negative yields. Perhaps the continent's inflation-linked bond market could do with a closer look. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net